Definition
Revaluation of currency refers to the increase in the value of a country’s currency relative to gold or other foreign currencies. This adjustment process is commonly executed by a government to address a persistent balance of payments surplus. Revaluing a currency has the effect of making imports cheaper for domestic consumers, but it also makes exports more expensive and therefore less competitive in the global market.
Examples
- China’s Currency Revaluation (2005): In 2005, China revalued its currency, the yuan, which had been pegged to the U.S. dollar. The revaluation made Chinese exports more expensive and imports cheaper, impacting the global trade dynamics.
- Swiss Franc Revaluation (2015): The Swiss National Bank opted to abandon the cap against the euro in 2015, causing a rapid revaluation of the Swiss franc. This event led to significant market volatility, making Swiss exports more costly.
Frequently Asked Questions (FAQs)
Q1: Why do governments revalue their currency?
A1: Governments may revalue their currency to address persistent balance of payments surpluses, control inflation, or influence their trade balance by making imports cheaper and managing economic growth.
Q2: What are the impacts of a currency revaluation on imports and exports?
A2: Revaluation makes imports cheaper for the domestic market, while it raises the cost of exports, potentially reducing their competitiveness in international markets.
Q3: How is revaluation different from devaluation?
A3: Revaluation increases the value of a currency compared to other currencies or gold, while devaluation decreases the value of a currency, making exports cheaper and imports more expensive.
Q4: What economic conditions prompt a currency revaluation?
A4: Conditions such as a strong balance of payments surplus, low inflation rates, and robust economic growth can prompt a government to revalue its currency.
Q5: Can a currency revaluation be detrimental to a country’s economy?
A5: Yes, while it reduces import costs, it can harm export industries by making their products less competitive abroad, potentially leading to job losses and economic slowdown in those sectors.
Related Terms
Devaluation:
The reduction of the value of a currency relative to other currencies or gold, aimed at making exports cheaper and imports more expensive to improve the trade balance.
Balance of Payments Surplus:
A situation where a country’s total international receipts exceed its international payments, often leading to upward pressure on the country’s currency.
Foreign Exchange Rate:
The value of one currency in terms of another currency, which is influenced by factors like trade balances, inflation, and interest rates.
Inflation:
A general increase in prices and fall in the purchasing value of money, which can influence decisions related to currency revaluation or devaluation.
Online References
- Investopedia on Currency Revaluation
- Federal Reserve Economic Data (FRED) on Exchange Rates
- IMF’s Financial Glossary
Suggested Books for Further Studies
- “International Economics” by Paul R. Krugman and Maurice Obstfeld: This book covers theories and real-world applications of international trade, including aspects like currency valuation.
- “Exchange Rate Economics: The Uncovered Interest Parity Puzzle and Other Anomalies” by Ronald MacDonald: An in-depth exploration of factors influencing exchange rates and related financial decisions.
- “Macroeconomics” by N. Gregory Mankiw: A comprehensive guide to macroeconomic principles, including currency valuations and their impact on the global economy.
Accounting Basics: “Revaluation of Currency” Fundamentals Quiz
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